Rica Company is a price-taker and uses target pricing. Refer to the following information: With the current cost structure, Rica cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

Question

Rica Company is a price-taker and uses target pricing. Refer to the following information:  With the current cost structure, Rica cannot achieve its profit goals. It will have to reduce either the fixed costs or the variable costs. Assuming that fixed costs cannot be reduced, how much will be the target variable costs per unit per year? (Round your answer to the nearest cent.)

Quizplus · Accepted Answer

Since Rica cannot reduce fixed costs, the only way to achieve the profit goal is by reducing variable costs. To calculate the target variable cost per unit per year, we use the following formula: 
Target Price = Total Cost + Profit
Target Variable Cost per Unit per Year = Target Price - Fixed Costs
From the given information, we know that Rica is a price-taker, meaning it has no control over the selling price. Therefore, we can use the current selling price of $60 as the target price. The profit goal is not given, so assume a reasonable profit margin of 20%. 
Target Price = $60
Profit Margin = 20% = $12
Total Cost = $60 - $12 = $48
Target Variable Cost per Unit per Year = $48 - $30 (Fixed Cost) = $18
Therefore, the target variable cost per unit per year is $18. Choice C is the closest option to this value, rounded to the nearest cent.

Rica Company Is a Price-Taker and Uses Target Pricing